Earlier this year, Crédit Agricole Corporate and Investment Bank (CACIB) launched a cooperation agreement with Leonteq Securities in the area of structured investment products through which the French bank will be able to deploy Leonteq's technology to customise and distribute structured products to its client network. SRP spoke to Samy Beji (pictured), global head of structuring and product development and Eric Etienne, global head of non-linear trading at Crédit Agricole CIB about the process of rebuilding the French bank's structured products business, the bank's risk appetite and the increasing focus on the Asia-Pacific market.

CACIB has accelerated the rebuilding of its equity derivatives business over the last 12 months through a joint venture between its global markets and equity solutions divisions three years after withdrawing from 'certain activities' and selling its €12.5bn portfolio of equity derivatives notional to BNP Paribas Global Equities and Commodity Derivatives (GECD).

According to Beji, post crisis, CACIB has been rebuilding the structured credit platform based on four core principles: putting client needs at the heart of the bank's 'product development philosophy'; diversifying across asset classes and technology 'to avoid dependency and excessive leverage'; giving compliance, legal, and operational aspects 'the same importance as trading and risk management capabilities'; and, leveraging on the experience gained through the bank's 'legacy management such as models, market liquidity, accumulation risk, and staff experience'.

"Our objective is and has always been to regain the confidence of our clients, the bank's senior management and all the stakeholders who backed the rebuild of the platform from the ground up on a market segment that remains encrypted in our DNA," says Beji. "This gave us the opportunity to resume the issuance of products through our MTN programme including fixed income securities for institutional, private banking and retail clients but also develop solution-based products such as secure funding, repackaging activities, corporate solution, advisory."

One of the lessons the investment bank learnt from the financial crisis is that the structured products business has to be based on diversification and the avoidance of risk accumulation, according to Etienne. "The crisis showed us that there are no toxic payoffs per se as long as you have the right amount of risk in your books," says Etienne. "Management now understands and appreciates the fact that we have systems and processes in place to manage the risks of our structured products business effectively."

According to Etienne, CACIB's structured products remains an attractive proposition for investors and clients for various reasons. "The group's credit profile remains very strong, and that gives our paper a natural appeal for investors," he says, adding that the bank's trading and structuring expertise is recognised, alongside with its capacity to manage exotic risk. "Our packaging capabilities are also very flexible to adapt to clients' requirements."

The structured products market has gone a long way post-crisis with regulation changing the way manufacturers operate externally and internally, according to Beji. "We think this is positive and gets the industry away from the black-box approach," says Beji. "The new requirements are adding transparency to the process and this is also something that we and investors welcome. Elements such as suitability and target market, price transparency, enhanced disclosure to clients are fully incorporated into our product development strategy."

According to Beji, rebuilding a business while taking into account the new regulatory requirements is a challenging process as you have to "dedicate significant resources to both".

"Regulations push banks to organise their business from a client perspective as opposed to a product approach," says Beji. "Examples such as Priips, Mifid 2 and the Prospectus Directive (PD) pose specific challenges for the structured product industry as it forces a number of banks to review their offering, processes, systems, etc."

CACIB expects "potential consolidation" as there are in excess of 16 pieces of regulation coming into the financial industry and "this will have an impact on the market and the ability of some firms to remain fully engaged with structured products and other activities", according to Beji.

The bank's risk appetite is growing but "we remain cautious in our approach", says Etienne, pointing that before the crisis, there was a lot more liquidity and depth of market around hedging "so the assumption was almost that liquidity was infinite".

"That has changed and the industry learnt it the hard way (in June 2008)," says Etienne. "Our approach has evolved as we no longer look only at our own risk but  we run numerous stress scenarios to manage our book making sure that should the market move significantly in one direction our exposures remain under control."

According to Beji, flow markets across asset classes are more challenging. "We think this is linked to both the rates environment as well geopolitical uncertainties," says Beji. "Clients (both for investment and hedging) are sensitive to this kind of situation and some of them would sit on the side-lines until there is more market clarity."

Beji also highlights that investors need markets with direction which is difficult to get as today's markets are very volatile. "Investors don't know what to do as it is very difficult to make a call regarding the direction of the rates, FX, credit, etc," says Beji. "This type of market environment is favourable to structured products as they can extract value from bull-bear and side-ways markets."

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